FORM 10-Q FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C

Transcription

1 FORM 10-Q FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF For the quarterly period ended March 31, ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF For the transition period from to. OR Clarion County Community Bank (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 333 Main Street Clarion, PA (Address of Principal Executive Offices) (Zip Code) (814) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No (Not applicable) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Smaller reporting company X Non-accelerated filer (Do not check if a smaller reporting company) Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X_ Indicate the number of shares outstanding of each of the issuer s classes of common stock, as of the latest practicable date: Class Number of Shares Outstanding as of May 1, 2012 Common Stock, $1.00 par value 1,661,255

2 INDEX TO FORM 10-Q PART I. Item 1 FINANCIAL INFORMATION Financial Statements PAGE Balance Sheets (Unaudited) March 31, 2012 and December 31, Statements of Income (Unaudited) Three months ended March 31, 2012 and Statements of Comprehensive Income (Unaudited) Three months ended March 31, 2012 and Statements of Cash Flows (Unaudited) Three months ended March 31, 2012 and Notes to Financial Statements (Unaudited) 7-24 Item 2 Management s Discussion and Analysis of Financial Condition and Results of Operations Item 4 Controls and Procedures 35 PART II. OTHER INFORMATION Item 1 Legal Proceedings 36 Item 1A Risk Factors 36 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 36 Item 3 Defaults Upon Senior Securities 36 Item 4 Removed and Reserved 36 Item 5 Other Information Item 6 Exhibits 38 SIGNATURES 39

3 PART 1 FINANCIAL INFORMATION CLARION COUNTY COMMUNITY BANK BALANCE SHEETS (UNAUDITED) MARCH 31, 2012 AND DECEMBER 31, 2011 Assets March 31, 2012 December 31, 2011 Cash and due from banks $ 709,890 $ 861,236 Interest bearing deposits in banks 5,739,962 3,786,382 Cash and cash equivalents 6,449,852 4,647,618 Certificates of deposit 1,844,000 2,342,000 Securities available for sale 22,195,495 19,314,206 Restricted bank stock, at cost 337, ,600 Loans 90,012,952 90,493,976 Less: Allowance for loan losses (1,234,297) (1,167,628) Net loans 88,778,655 89,326,348 Premises and equipment, net 1,593,944 1,624,067 Other real estate owned, net 216, ,500 FDIC prepaid assessment 170, ,142 Bank owned life insurance 1,353,159 1,341,677 Deferred taxes 341, ,874 Accrued interest receivable and other assets 615, ,750 Liabilities Total Assets $ 123,896,353 $ 120,317,782 Non-interest bearing demand deposits $ 13,699,736 $ 12,177,317 Interest bearing deposits 95,578,976 95,770,758 Total Deposits 109,278, ,948,075 Accrued interest payable and other liabilities 2,493, ,860 Total Liabilities 111,772, ,470,935 Stockholders Equity Preferred stock, 1,000,000 shares authorized, no shares issued - - Common Stock ($1 Par Value) Authorized 10,000,000 shares, Issued and outstanding: 1,661,255 shares March 31, 2012 and December 31, ,661,255 1,661,255 Surplus 10,621,461 10,621,461 Accumulated deficit (377,328) (642,542) Accumulated other comprehensive income, net 218, ,673 Total Stockholders Equity 12,123,818 11,846,847 Total Liabilities & Stockholders Equity $ 123,896,353 $ 120,317,782 The accompanying notes are an integral part of these financial statements. Page 3

4 CLARION COUNTY COMMUNITY BANK STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND Interest Income Loans, including fees $ 1,299,361 $ 1,384,122 Taxable securities 52,886 48,182 Tax exempt securities 88,247 20,206 Interest-bearing deposits 4,561 6,110 Federal funds sold - 1,539 Total interest income 1,445,055 1,460,159 Interest Expense Deposits 292, ,115 Total interest expense 292, ,115 Net Interest Income 1,152,124 1,101,044 Provision for Loan Losses 66, ,000 Net Interest Income after Provision for Loan Losses 1,086, ,044 Other Income Service fees 33,503 37,589 Bank owned life insurance income 11,482 11,781 Other 50,006 20,471 Total other income 94,991 69,841 Other Expenses Salaries 246, ,644 Employee benefits and payroll taxes 114,066 93,908 Occupancy and equipment 70,729 73,909 Data processing 111,123 92,978 Professional fees 75,933 37,700 FDIC insurance 20,683 42,380 Other 190, ,256 Total other expenses 829, ,775 Income Before Income Tax Expense 351, ,110 Income Tax Expense 86, ,694 Net Income $ 265,214 $ 234,416 Earnings per Share: Basic $ 0.16 $ 0.14 Diluted $ 0.16 $ 0.14 The accompanying notes are an integral part of these financial statements. Page 4

5 CLARION COUNTY COMMUNITY BANK STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 March 31, 2012 March 31, 2011 Net Income $ 265,214 $ 234,416 Unrealized holding gains on securities available for sale 16,013 17,510 Reclassification adjustment for losses (gains) realized in income - - Net unrealized gains (losses) 16,013 17,510 Tax effect (5,444) (5,954) Net of tax amount 10,569 11,556 Prior service cost arising in prior years on employee supplemental retirement plan - - Amortization of prior service cost 1,800 1,800 Net impact of prior service cost 1,800 1,800 Tax effect (612) (612) Net-of-tax amount 1,188 1,188 Other comprehensive income (loss) 11,757 12,744 Total comprehensive income $ 276,971 $ 247,160 The accompanying notes are an integral part of these financial statements. Page 5

6 CLARION COUNTY COMMUNITY BANK STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 265,214 $ 234,416 Adjustments to reconcile net income to net cash from operating activities: Depreciation 38,288 41,335 Net amortization of premiums and discounts 28,072 32,902 Provision for loan losses 66, ,000 Net gains on sale of loans held for sale (27,642) - Loans originated for sale (320,673) - Proceeds from sale of loans held for sale 336,303 - Net loss on sale and writedowns of OREO 38,907 - Deferred taxes ,694 Earnings in bank owned life insurance (11,482) (11,781) Changes in: Deferred loan fees (2,321) 2,087 Accrued interest receivable and other assets (45,029) (32,508) Accrued interest payable and other liabilities 19,453 12,989 Net Cash From Operating Activities 385, ,134 CASH FLOWS USED BY INVESTING ACTIVITIES Maturities and calls of securities available for sale 928, ,502 Purchases of securities available for sale (1,868,446) - Maturities of certificates of deposit 1,245, ,000 Purchases of certificates of deposit (747,000) - Purchases of restricted bank stock (9,100) (65,000) Calls on restricted stock - 16,200 Proceeds from sale of foreclosed assets 61,093 - Loan originations and repayments, net 484,014 (644,736) Purchases of premises and equipment (8,165) (21,283) Net Cash Used By Investing Activities 85, ,683 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 1,330,637 (938,194) Net Cash From Financing Activities 1,330,637 (938,194) Net Change in Cash and Cash Equivalents 1,802,234 (258,378) Cash and Cash Equivalents at December 31 4,647,618 7,684,915 Cash and Cash Equivalents at March 31 $ 6,449,852 $ 7,426,538 SUPPLEMENTAL DISCLOSURES Interest paid $ 296,895 $ 359,432 Income taxes paid 100,000 - Non-cash disclosures Foreclosed assets acquired in settlement of loans - - Purchase of securities, not settled 1,953,310 - The accompanying notes are an integral part of these financial statements. Page 6

7 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any future interim period. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The interim financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Clarion County Community Bank Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Federal Deposit Insurance Corporation. NOTE 2 EARNINGS PER SHARE Basic earnings per share is calculated using the weighted-average number of shares outstanding. Earnings per share is restated for all stock dividends through the date of issuance of the financial statements. The weighted average shares outstanding were 1,661,255 for the three ended March 31, 2012 and March 31, There was no dilution to the weighted average shares outstanding as a result of 310,921 and 316,902 stock options outstanding, for the three months ended March 31, 2012 and March 31, 2011, respectively, as the options were anti-dilutive. NOTE 3 LOANS Total net loans at March 31, 2012 and December 31, 2011 was as follows: March 31, December 31, Commercial $ 18,711,590 $ 16,024,603 Commercial real estate: Construction 288, ,129 Other 31,737,994 33,139,208 Residential real estate 33,200,124 34,970,617 Consumer: Auto 1,878,257 2,020,683 Other 4,304,435 4,267,505 Less: Net deferred loan fees (107,448) (109,769) Allowance for loan losses (1,234,297) (1,167,628) Total $ 88,778,655 $ 89,326,348 Page 7

8 NOTE 3 LOANS (continued) The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2012: Commercial Real Residential Real Commercial Estate Estate Consumer Unallocated Total Allowance for loan losses: Beginning balance, January 1, 2012 $ 319,668 $ 471,331 $ 192,655 $ 93,719 $ 90,255 $ 1,167,628 Provision for loan losses 36,293 71,087 22,858 (33,454) (30,784) 66,000 Loans charged-off Recoveries Total ending balance, March 31, 2012 $ 355,961 $ 542,418 $ 215,513 $ 60,934 $ 59,471 $ 1,234,297 The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2011: Commercial Real Residential Real Commercial Estate Estate Consumer Unallocated Total Allowance for loan losses: Beginning balance $ 302,693 $ 576,863 $ 180,332 $ 92,044 $ 3,515 $ 1,155,447 Provision for loan losses 25,039 26,154 (3,353) (4,870) 71, ,000 Loans charged-off (81,171) (231,840) (313,011) Recoveries Total ending allowance balance $ 246,561 $ 371,177 $ 176,979 $ 87,174 $ 74,545 $ 956,436 The next several tables excludes interest receivable and deferred loan fees from the recorded investment. Accrued interest receivable at March 31, 2012 and December 31, 2011 totaled $243,063 and $264,772, respectively. Net deferred loan fees at March 31, 2012 and December 31, 2011 totaled $(107,449) and $(109,769), respectively. Page 8

9 NOTE 3 LOANS (continued) The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012: Commercial Residential Real Real Commercial Estate Estate Consumer Unallocated Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 21,239 $ 251,454 $ - $ 2,306 $ - $ 274,999 Collectively evaluated for impairment 334, , ,513 58,628 59, ,298 Total ending allowance balance $ 355,961 $ 542,418 $ 215,513 $ 60,934 $ 59,471 $ 1,234,297 Loans: Loans individually evaluated for impairment $ 65,875 $ 1,206,930 $ - $ 24,715 $ - $ 1,297,520 Loans collectively evaluated for impairment 18,645,715 30,819,064 33,200,124 6,157,977-88,822,880 Total $ 18,711,590 $ 32,025,994 $ 33,200,124 $ 6,182,692 $ - $ 90,120,400 The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011: Commercial Residential Real Real Commercial Estate Estate Consumer Unallocated Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 25,449 $ 270,222 $ - $ 25,932 $ - $ 321,603 Collectively evaluated for impairment 294, , ,655 67,787 90, ,025 Total ending allowance balance $ 319,668 $ 471,331 $ 192,655 $ 93,719 $ 90,255 $ 1,167,628 Loans: Loans individually evaluated for impairment $ 67,962 $ 1,198,996 $ - $ 42,188 $ - $ 1,309,146 Loans collectively evaluated for impairment 15,956,641 32,121,341 34,970,617 6,246,000-89,294,599 Total $ 16,024,603 $ 33,320,337 $ 34,970,617 $ 6,288,188 $ - $ 90,603,745 Page 9

10 NOTE 3 LOANS (continued) The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2012: As of March 31, 2012 Three Months Ended March 31, 2012 Unpaid Allowance for Average Interest Cash Basis Principal Recorded Loan Losses Recorded Income Interest Balance Investment Allocated Investment Recognized Recognized With no related allowance recorded: Commercial $ 2,143 $ 2,143 $ - $ 2,143 $ - $ - Commercial real estate: Construction Other 350, , ,457 3,266 3,266 Consumer: Auto 1,654 1,654 10, Other Subtotal 354, , ,680 3,362 3,362 With an allowance recorded: Commercial 85,732 63,732 21,239 64, Commercial real estate: Construction Other 952, , , ,506 3,110 3,110 Consumer: Auto 17,029 17,029 1,703 17, Other 6,032 6, , Subtotal 1,060, , , ,653 3,990 3,990 Total $ 1,414,987 $ 1,297,520 $ 274,999 $ 1,303,333 $ 7,352 $ 7,352 The unpaid principal balance for purposes of the aforementioned table includes $117,467 that has been partially charged off but not forgiven as of March 31, Page 10

11 NOTE 3 LOANS (continued) The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011: Unpaid Allowance for Principal Recorded Loan Losses Balance Investment Allocated With no related allowance recorded: Commercial $ 2,143 $ 2,143 $ - Commercial real estate: Construction Other 209, ,966 - Subtotal 212, ,109 - With an allowance recorded: Commercial 87,819 65,819 25,449 Commercial real estate: Construction Other 1,084, , ,222 Consumer: Auto 35,994 35,994 21,596 Other 6,194 6,194 4,336 Subtotal 1,214,504 1,097, ,603 Total $ 1,426,613 $ 1,309,146 $ 321,603 The unpaid principal balance for the purposes of the aforementioned table includes $117,467 that has been partially charged-off but not forgiven. The following table presents information related to loans individually evaluated for impairment by class of loans for the three months ended March 31, 2011: Average Interest Cash Basis Recorded Income Interest Investment Recognized Recognized With no related allowance recorded: Commercial $ 1,909 $ - $ - Commercial real estate: Construction Other 50, Subtotal 51, With an allowance recorded: Commercial 115, Commercial real estate: Construction Other 416,251 1,348 1,000 Subtotal 532,068 1,650 1,000 Total $ 583,977 $ 1,650 $ 1,000 Page 11

12 NOTE 3 LOANS (continued) Nonaccrual loans were as follows: March 31, December 31, Nonaccrual loans: Commercial $ 27,890 $ 27,890 Commercial real estate: Construction - - Other 539, ,248 Residential real estate 301, ,527 Consumer: Auto - - Other - 2,261 Total $ 868,289 $ 1,181,926 There were no loans past due 90 days still on accrual status at March 31, 2012 or December 31, Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance single-family mortgage and consumer loans that are collectively evaluated for impairment and individually classified impaired loans. The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 by class of loan: Greater Than Loans Days Days 90 Days Total Not Total Past Due Past Due Past Due Past Due Past Due Commercial $ 18,711,590 $ 33,948 $ - $ 27,890 $ 61,838 $ 18,649,752 Commercial real estate: Construction 288, ,000 Other 31,737,994 62, , , ,203 30,968,791 Residential real estate 33,200, , , , ,259 32,655,865 Consumer Auto 1,878, ,878,257 Other 4,304,435-4,631-4,631 4,299,804 Total $ 90,120,400 $ 236,743 $ 274,899 $ 868,289 $ 1,379,931 $ 88,740,469 Page 12

13 NOTE 3 LOANS (continued) The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 by class of loan: Greater Than Loans Days Days 90 Days Total Not Total Past Due Past Due Past Due Past Due Past Due Commercial $ 16,024,603 $ 34,522 $ - $ 27,890 $ 62,412 $ 15,962,191 Commercial real estate: Construction 181, ,129 Other 33,139, , ,958 32,617,250 Residential real estate 34,970, , , , ,931 33,990,686 Consumer Auto 2,020, ,020,683 Other 4,267, ,155-3,590 4,263,915 Total $ 90,603,745 $ 508,512 $ 214,667 $ 844,712 $ 1,567,891 $ 89,035,854 Troubled Debt Restructurings: The Bank has allocated $143,000 and $197,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, The Bank has not committed to lend additional amounts as of March 31, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings. During the period ending March 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. However, no modifications resulted in a permanent reduction of the recorded investment. There were no loans modified as troubled debt restructurings that occurred during the quarter ended March 31, There was one loan modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, A loan in the amount of $168,000 was recorded as a troubled debt restructuring during the fourth quarter of 2011 and was 63 days in default at March 31, A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank s internal underwriting policy. Credit Quality Indicators: The Bank categorizes loans into risk categories based on relevant information about the ability of Page 13

14 NOTE 3 LOANS (continued) borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Bank uses the following definitions for risk ratings: Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are evaluated for credit quality based on aging status, which was previously presented. Based on the most recent analysis performed, the risk category of loans by class of loans as of March 31, 2012 was as follows: March 31, 2012 Total Not Special Loans Rated Pass Mention Substandard Doubtful Commercial $ 18,711,590 $ - $ 18,645,715 $ 14,179 $ 51,696 $ - Commercial real estate Construction 288, , Other 31,737,994-29,749, ,669 1,171, ,791 Residential real estate 33,200,124 32,642, , ,065 - Consumer-auto 1,878,257 1,861,228-17, Other 4,304,435 4,298,403-6, Total $ 90,120,400 $ 38,802,159 $ 48,683,200 $ 877,440 $ 1,523,810 $ 233,791 Page 14

15 NOTE 3 LOANS (continued) Based on the most recent analysis performed, the risk category of loans by class of loans as of December 31, 2011 was as follows: December 31, 2011 Total Not Special Loans Rated Pass Mention Substandard Doubtful Commercial $ 16,024,603 $ - $ 15,956,641 $ - $ 40,072 $ 27,890 Commercial real estate Construction 181, , Other 33,139,208-31,224,251-1,579, ,095 Residential real estate 34,970,617 34,420, , ,276 72,042 Consumer-auto 2,020,683 1,962, ,489 - Other 4,267,505 4,261, ,194 - Total $ 90,603,745 $ 40,643,825 $ 47,362,021 $ 139,979 $ 2,022,893 $ 435,027 NOTE 4 SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN The Board of Directors adopted a supplemental employee retirement plan for certain officers of the Bank on April 15, Participants will receive 30% of their final base salary annually for fifteen years beginning with the later of retirement or age 65 subject to vesting provisions for years of service. The plan requires ten years of service to be fully vested. Upon adoption, each participant was credited with service for years they have been with the Bank which resulted in participants being 35% vested on average. The prior service cost upon adoption of the supplemental retirement plan was approximately $130,000. The prior service cost is being amortized over the estimated future service period on a straight line basis. Total expense related to the plan for the three months ended March 31, 2012 and 2011 was $21,141 and $20,316. The accrued supplemental retirement liability for this plan was $246,292 at March 31, 2012 and $226,951 at December 31, Amortization of prior service cost for the three months ended March 31, 2012 and 2011 was $1,800. At March 31, 2012 and December 31, 2011, the unamortized prior service cost from the supplemental retirement plan was $117,400 and $119,200, for an after tax amount of $77,484 and $78,672 recorded in accumulated other comprehensive loss. NOTE 5 SECURITIES AVAILABLE FOR SALE Available-for-sale securities at March 31, 2012 consisted of the following: Residential mortgage-backed March 31, 2012 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value securities $ 9,442,939 $ 185,693 $ (10,052) $ 9,618,580 State and municipal bondstax-free 10,285, ,173 (15,210) 10,528,542 U.S. government sponsored entities and agencies 2,018,623 29,750-2,048,373 $ 21,747,141 $ 473,616 $ (25,262) $ 22,195,495 Page 15

16 NOTE 5 SECURITIES AVAILABLE FOR SALE (continued) Available-for-sale securities at December 31, 2011 consisted of the following: December 31, 2011 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Residential mortgage-backed securities $ 7,302,909 $ 176,973 $ (5,285) $ 7,474,597 State and municipal bondstax-free 9,557, ,123 (7,968) 9,785,758 U.S. government sponsored entities and agencies 2,021,353 32,498-2,053,851 $ 18,881,865 $ 445,594 $ (13,253) $ 19,314,206 The following table summarizes the investment securities with unrealized losses at March 31, 2012 and December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position: March 31, 2012 Less Than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Available-for-sale Residential mortgagebacked securities $ 2,033,010 $ (10,052) $ - $ - $ 2,033,010 $ (10,052) State and municipal bondstax free 686,057 (15,210) ,057 (15,210) Total available-for-sale $ 2,719,067 $ (25,262) $ - $ - $ 2,719,067 $ (25,262) December 31, 2011 Less Than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Available-for-sale Residential mortgagebacked securities $ 1,008,658 $ (5,285) $ - $ - $ 1,008,658 $ (5,285) State and municipal bondstax free 380,145 (4,505) 507,941 (3,463) 888,086 (7,968) Total available-for-sale $ 1,388,803 $ (9,790) $ 507,941 $ (3,463) $ 1,896,744 $ (13,253) Page 16

17 NOTE 5 SECURITIES AVAILABLE FOR SALE (continued) The following is a schedule of the contractual maturity of securities available for sale at March 31, 2012 and December 31, 2011: March 31, 2012 December 31, 2011 Amortized Fair Amortized Fair Cost Value Cost Value 1 year or less $ - $ - $ - $ - 1 year 5 years 1,018,623 1,028,325 1,021,352 1,033,289 5 years 10 years 1,991,327 2,055,074 1,991,215 2,065,347 After 10 years 9,294,252 9,493,516 8,566,389 8,740,973 12,304,202 12,576,915 11,578,956 11,839,609 Residential mortgage backed securities 9,442,939 9,618,580 7,302,909 7,474,597 Total debt securities $ 21,747,141 $ 22,195,495 $ 18,881,865 $ 19,314,206 Residential mortgage backed securities are not due at a single maturity date; periodic payments are received based on the payment patterns of the underlying collateral. The Bank did not have any sales of securities available for sale during the three months ended March 31, 2012 or Of the Bank s investment securities, $6,588,000 and $6,948,000 were pledged at March 31, 2012 and December 31, 2011 to secure public deposits, respectively. NOTE 6 FAIR VALUE DISCLOSURE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Significant unobservable inputs that reflect the Bank s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Bank used the following methods and significant assumptions to estimate fair value: Investment Securities Available for Sale: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values Page 17

18 NOTE 6 FAIR VALUE DISCLOSURE (continued) are calculated using discounted cash flows or other market indicators (Level 3). The Bank has no investment securities listed as level 1 or 3 for fair value purposes. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower s financial statements, or aging reports, adjusted or discounted based on management s historical knowledge, changes in market conditions from the time of the valuation, and management s expertise and knowledge of the client and client s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Page 18

19 NOTE 6 FAIR VALUE DISCLOSURE (continued) Assets measured at fair value on a recurring basis are summarized below: (Level 1) (Level 2) Quoted Prices in Significant (Level 3) Active Markets Other Significant March 31, for Identical Observable Unobservable 2012 Description Total Assets Inputs Inputs Residential mortgage-backed securities $ 9,618,580 $ - $ 9,618,580 $ - State and municipal bondstax-free 10,528,542-10,528,542 - U.S. government sponsored entities and agencies 2,048,373-2,048,373 - Total investment securities available-for-sale $ 22,195,495 $ - $ 22,195,495 $ - (Level 1) (Level 2) Quoted Prices in Significant (Level 3) December 31, Active Markets Other Significant 2011 for Identical Observable Unobservable Description Total Assets Inputs Inputs Residential mortgage-backed securities $ 7,474,597 $ - $ 7,474,597 $ - State and municipal bondstax-free 9,785,758-9,785,758 - U.S. government sponsored entities and agencies 2,053,851-2,053,851 - Total investment securities available-for-sale $ 19,314,206 $ - $ 19,314,206 $ - Page 19

20 NOTE 6 FAIR VALUE DISCLOSURE (continued) Assets measured at fair value on a nonrecurring basis are as follows: (Level 1) (Level 2) Quoted Prices in Significant (Level 3) Active Markets Other Significant March 31, for Identical Observable Unobservable 2012 Description Total Assets Inputs Inputs Other real estate owned: Commercial real estate $ 217,000 $ - $ - $ 217,000 Impaired loans: Commercial $ 42,000 $ - $ - $ 42,000 Commercial real estate 605, ,000 Consumer: Auto 15, ,000 Other 5, ,000 (Level 1) (Level 2) Quoted Prices in Significant (Level 3) December 31, Active Markets Other Significant 2011 for Identical Observable Unobservable Description Total Assets Inputs Inputs Other real estate owned: Commercial real estate $ 257,000 $ - $ - $ 257,000 Residential real estate 60, ,000 Impaired loans: Commercial $ 40,000 $ - $ - $ 40,000 Commercial real estate 719, ,000 Consumer: Auto 14, ,000 Other 2, ,000 Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $943,000, with a valuation allowance of $275,000 at March 31, The additional provision for loan loss for the three months ended March 31, 2012 was considered immaterial. At December 31, 2011, impaired loans had a recorded investment of $1,097,000, with a valuation allowance of $322,000 for the year ending December 31, Impaired loans measured at fair value resulted in additional provision of $43,000 for the three months ended March 31, Other real estate owned which is measured at the lower of carrying or fair value less costs to sell had a carrying amount of $217,000 at March 31, 2012 after a writedown of $40,000 during the three months ended March 31, At December 31, 2011, other real estate owned had a carrying amount of $317,000 after writedowns of $25,000 during Page 20

21 NOTE 6 FAIR VALUE DISCLOSURE (continued) The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis at March 31, 2012: Range (Weighted Valuation Unobservable Average Fair Value Technique(s) Input(s) Discount) Other real estate owned: Commercial real estate $ 217,000 Sales comparison Adjustments for differences 63.8% approach between comparible sales and selling costs Impaired loans: Commercial $ 42,000 Sales comparison Adjustment for differences 0.0% % approach between the comparible sales Impaired loans: Commercial real estate $ 605,000 Sales comparison Adjustment for differences 0.0% % approach between the comparible sales Impaired loans: Consumer-auto $ 15,000 Sales comparison Adjustment for differences 10.0% approach between the comparible sales Impaired loans: Consumer-other $ 5,000 Sales comparison Adjustment for differences 10.0% approach between the comparible sales The carrying amount and estimated fair values of the financial instruments were as follows at March 31, 2012 and December 31, Financial assets: Fair Value Measurements at March 31, 2012 Using: Carrying Total Amount Level 1 Level 2 Level 3 Fair Value Cash and cash equivalents $ 6,449,852 $ 6,449,852 $ - $ - $ 6,449,852 Certificates of deposit 1,844,000-1,851,192-1,851,192 Securities available-for-sale 22,195,495-22,195,495-22,195,495 Restricted bank stock 337,700 N/A N/A N/A N/A Loans receivable, net 88,778, ,392,817 89,392,817 Accrued interest receivable 372,324 16, , , ,324 Financial liabilities: Deposits (109,278,712) (57,118,658) (52,786,708) - (109,905,366) Accrued interest payable (103,472) (825) (102,647) - (103,472) Page 21

22 NOTE 6 FAIR VALUE DISCLOSURE (continued) December 31, 2011 Financial assets: Carrying Amount Fair Value Cash and cash equivalents $ 4,647,618 $ 4,647,618 Certificates of deposit 2,342,000 2,349,026 Securities available-for-sale 19,314,206 19,314,206 Restricted bank stock 328,600 N/A Loans receivable, net 89,326,348 89,935,575 Accrued interest receivable 386, ,292 Financial liabilities: Deposits (107,948,075) (108,697,505) Accrued interest payable (107,436) (107,436) The methods and assumptions, not previously presented, used to estimate fair values are described as follows: Cash and Cash Equivalents The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1. Certificates of Deposit The fair value of certificates of deposit with other banks is estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities, resulting in a Level 2 classification. Restricted Bank Stock It is not practical to determine the fair value of restricted bank stock due to restrictions placed on its transferability. Loans Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. Page 22

23 NOTE 6 FAIR VALUE DISCLOSURE (continued) Deposits The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate and fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. Accrued Interest Receivable/Payable The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification based upon the classification of the underlying asset or liability. NOTE 7 FINANCIAL INSTRUMENTS WITH OFF BALANCE-SHEET RISK There are various outstanding commitments and contingent liabilities arising in the normal course of business that are not reflected in the accompanying financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows: March 31, 2012 December 31, 2011 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to make loans $ 1,219,000 $ 1,272,000 $ 1,635,000 $ 1,077,000 Unused lines of credit 293,000 6,275, ,000 5,839,000 Standby letters of credit 349, ,000 - These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management's credit evaluation of the party. The terms are typically for a one-year period, with annual renewal options subject to prior approval by management. The fixed rate loan commitments have interest rates ranging from 3.38% to 6.25% at March 31, Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of outstanding commercial and personal lines of credit. The exposure to loss under these commitments is limited by subjecting them to credit approval and Page 23

24 NOTE 7 FINANCIAL INSTRUMENTS WITH OFF BALANCE-SHEET RISK (continued) monitoring procedures. Substantially all of the commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Since many of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future funding requirements. The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. Management believes that the current amount of the liability as of March 31, 2012 for guarantees under issued standby letters of credit is not material. Page 24

25 Item 2 - MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q may contain forward-looking statements. These forwardlooking statements relate to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. When used in this discussion, the word may, could, would, should, believes, anticipates, estimates, contemplates, projects, expects, intends, plans and similar expressions are intended to identify forwardlooking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include the following: fluctuating interest rates; general economic conditions; non-payment of loans by our borrowers; business conditions in the banking industry; the regulatory environment, including the imposition of increased deposit insurance rates and other regulatory requirements; rapidly changing technology and evolving banking industry standards; competitive factors; activities of shareholders hostile to management; new service and product offerings by competitors and price pressures; and similar items. Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. We do not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual events. General The Bank is a Pennsylvania-chartered commercial bank that commenced operations on January 8, Critical Accounting Policies Our accounting policies are fundamental to understanding this Management s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in our financial statements and accompanying notes. Since future events and their effect cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. The amounts currently estimated by us would change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management believes the following critical accounting policies encompass the more significant judgments and estimates used in preparation of our financial statements. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses. Loans that are determined to be uncollectible are charged against the allowance account, and subsequent recoveries, if any, are credited to the allowance. When evaluating the adequacy of the allowance, an assessment of the loan portfolio will typically include Page 25

26 changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions which may affect borrowers ability to repay, and other factors which may warrant current recognition. Such periodic assessments may, in management s judgment, require the Bank to recognize additions or reductions to the allowance. Various regulatory agencies periodically review the adequacy of the Bank s allowance for loan losses as an integral part of their examination process. Such agencies may require the Bank to recognize additions or reductions to the allowance based on their evaluation of information available to them at the time of their examination. It is reasonably possible that the above factors may change significantly and, therefore, affect management s determination of the allowance for loan losses in the near term. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for allowance calculation. Income Taxes The Bank uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred federal tax assets and liabilities were recognized for the expected future tax consequences of existing differences between financial statement and tax bases of existing assets and liabilities. The effect of a change in the tax rate on deferred taxes is recognized in the period of the enactment date. Deferred tax assets were reduced by a valuation allowance, when, in the opinion of management, it was more likely than not that some portion of the deferred tax assets would not be realized. As of September 30, 2009, due to a steady increase in income and the determination that it appeared probable that future earnings would continue, management chose to reverse the deferred tax asset valuation allowance. Management s reversal of the valuation allowance against deferred tax assets was predicated on the Bank s profitability which included net income being generated for the years ending 2007 and 2008 and net income through the first three quarters of Additionally at the time of reversal, the Bank expected to generate taxable income for 2010 which occurred and has generated taxable income for the year ended December 31, 2011 and the first three months of Furthermore, the Bank has consistently met budget and strategic planning profitability projections during these periods. Page 26